THE BIG SHORT 2
BUT CAN GERMAN GIANT RECOVER?
A LONDON hedge fund has emerged as one of the big winners of the panic that engulfed Deutsche Bank last week – making tens of millions of pounds as shares in Germany’s biggest bank slumped.
Marshall Wace, whose boss Paul Marshall is a former Liberal Democrat donor and philanthropist, has been betting on the bank’s shares falling since at least February.
The $24billion (£18.5billion) fund, based off Sloane Square in Chelsea, uses a computer-driven investment strategy that decides what to wager depending on the recommendations of investment banking analysts.
In February, it told German financial regulators it had taken a short position in Deutsche Bank, then worth €100 million (£86 million). Since then Deutsche shares have slumped by a third, generating a profit for Marshall Wace of well over £20million.
But Marshall Wace, co-founded by Ian Wace, has been increasing its short position ever since February including further gambles on the share price in the last few days – making it the biggest short-seller of the bank’s shares, meaning that its profits from the recent slump in Deustche shares is likely to be even higher.
Its total short position now amounts to the equivalent of about one per cent of Deutsche’s shares worth €150million (£130million). Short-sellers borrow shares which they sell with the aim of buying them back later at a lower price. They were vilified during the last banking crisis, portrayed in the 2015 film The Big Short, but shorting is still regarded by most market professionals as a vital part of the market system.
Marshall’s son Winston is banjo player in pop group Mumford & Sons, and Marshall was one of the ‘Red Knights’ proposing to buy Manchester United for £1billion in 2010. As well as chairing academy school provider ARK Schools, he chairs the board of trustees at Education Policy Institute, run by former Liberal Democrat Minister David Laws.
Marshall Wace is far from alone in shorting Deutsche Bank shares. A large number of investment funds including those led by veteran financier George Soros have gambled on a slump at Deutsche Bank this year. By Friday the bank had managed to restore some calm to markets. Its Yorkshire-born boss John Cryan told colleagues: ‘Our bank has become subject to speculation. Ongoing rumours are causing significant swings in our stock price. It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust.’
Investors had become concerned about the bank because it may have to pay $14billion to US regulators over the sale of subprime securities a decade ago. Reports late on Friday that a much lower fine would soon be agreed also boosted confidence.
Shares in Deutsche Bank ended up at €11.57, having plumbed record lows of less than €10 earlier in the week. Even so the share price is far below €22 price in January. The cost to insure the bank’s bonds, known as Credit Default Swaps, has also soared in recent weeks and remains high by the standards of other major banks.
Marshall Wace declined to comment on its Deutsche Bank bet.
For the German Bank, the immediate storm had abated by this weekend. But it still faces a long struggle to regain full health. It has been struggling to turn in decent profits, which would otherwise enable it to replenish its capital, and critics point to huge derivatives positions which make an accurate assessment of its risks extremely complex.
Deutsche had €223billion of liquid assets at the end of its second quarter. Analysts at investment bank Macquarie said Deutsche’s accounts showed that would last eight weeks if there was a severe stress ‘including multiple rating notch downgrades and a severe market dislocation’.
Even then, it would be able to raise a further €50billion to meet shortterm requirements. But while reports of Deutsche Bank’s imminent demise may have been exaggerated, the share price is still under huge pressure.
Research firm Redburn Partners wrote to clients that the bank’s ‘equity shareholders are very much at risk’. For those still shorting Deutsche Bank that will of course mean an opportunity.